maybe an ill-posed question, please advise 🙂

What is the difference between the 3 concepts? They all seem about optimising some risk/reward ratio...

  • money management

  • asset allocation

  • portfolio optimisation


"Money management" is the art or business of managing money on behalf of an investor (individual or institutions such as pension fund, college endowment, etc.).

Money managers usually organize their work by making decisions in a hierarchical fashion on 3 different levels:

  • Strategic Asset Allocation (highest level, few decisions - infrequently made). Broadly speaking, how much should usually be invested in various assets (ex: 50% stocks, 40% bonds, 10% commercial real estate).

  • Tactical Asset Allocation. How should the weights change based on the current outlook for the assets (ex: should we reduce out stock exposure from 50% to 40% for the next few quarters based on the high uncertainty for the economy at the present moment).

  • Security selection (lowest level, very large number of decisions - frequently made). What specific stocks should be buy or sell within our 40% stock allocation. Should we sell some or all of our Toyota stock and buy Tesla instead?

At all three levels various approaches are possible. At one extreme a money manager (a human being) or a team of them could make the decisions by themselves in an extremely informal manner (discretionary money management). Or it could be a highly automated process performed by algorithms with the human beings designing the algorithms and perhaps intervening only in special cases (quant money management). And everything in between (some things automated, some not).

Portfolio optimisation is a mathematical approach developed by people like Markowitz and Black-Litterman that tries to automate or quantify the process. In practise it is best used for asset allocation (first two levels), although in principle it could be used for all three. Portfolio optimisation is a mathematical technique that attempts to address the business/art of money management, with mixed but perhaps gradually increasing success.

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  • $\begingroup$ thanks @noob2 for takin the effort - I realised the terms are even broader than what I thought. I intended money management in the sense of "kelly criterion" and similar, i.e. what% of your capital you should risk... $\endgroup$ – elemolotiv Jun 19 at 16:43
  • $\begingroup$ Yes, that is another meaning, unfortunately... Money Management in the sense of Position Sizing and "how much risk to take" in trading (especially speculative trading with derivatives). $\endgroup$ – noob2 Jun 19 at 16:44
  • $\begingroup$ yes, for example I am wondering if the Markowitz portfolio optimisation and the Kelly-criterion are at some conceptual level the same thing - but I admit that is not really explicit int the question 😊 $\endgroup$ – elemolotiv Jun 19 at 17:05

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